Q2 2024 review: Markets recover amid elections uncertainty
Markets rallied in June with several global benchmarks hitting all-time highs, closing up 4.4% over the month and 3.3% over the quarter. Markets appeared unfazed by the upcoming elections in several major countries, with stocks led by US equities as earnings continued to come in strongly.
Emerging markets also recovered as growth remained on track, despite a brief dip amid uncertainty around the Chinese economy and a weaker than expected election result for Prime Minister Modi in India.
European equities were the worst-performing region over the month and quarter (down 2.9% and 1.2% respectively), as an unexpected French election spooked investors in the French stock market. At the time of writing, the nationalist National Rally appear set to be the dominant party in France.
Gold, though flat in June, had a strong quarter, rising 4.2%, and is up 21% over the year as Central Banks increased purchases as they seek to diversify away from US Dollars amid discussions of Russian asset confiscation.
Energy prices rallied over the month as demand remained firm, combined with growing fears of an expanded conflict in the Middle East as Israel and Hezbollah traded blows. UK and US bond yields fell back slightly over the month but remained solidly up over the quarter - up 0.23% and 0.18% respectively - as both countries compete for timing of the first rate cut.
Assets in focus
Bond yields
Past performance is not a reliable indicator of current or future returns. Source: Fundment
Areas to watch...
The UK general election results are expected on 5 July, with Labour likely to return to power for the first time since 2010.
The decisive second round of the French general election will take place on 7 July, with the nationalist National Rally securing 33% of the vote in the first round.
The next Federal Reserve meeting is at the end of July with markets now expecting rates to be held flat until September. However, participant commentary remains closely monitored.
News...
UK unemployment rate highest since '21
General election campaigning is ramping up, with attention being paid to Labour’s tax and spending promises. Polling suggests Sir Keir Starmer will be the next UK Prime Minister.
The unemployment rate rose to 4.4% in April (from 4.3%) while the claimant count for May rose 50,400. Both readings are the weakest since 2021 as higher interest rates appear to bite.
The Composite PMI confidence survey dropped to a seven-month low of 51.7 in June (53.0 in May), with services companies reporting subdued demand ahead of the General Election.
US inflation reading below forecasts
Inflation as measured by the Consumer Price Index fell to 3.3% in May (3.4% in June) and, though a marginal drop, it was the first time in several months the reading came in below forecasts, providing relief to markets.
The Federal Reserve kept rates steady at the latest meeting, while official forecasts indicated policymakers now expect only one rate cut this year, rather than the three forecast in March.
Non-farm payrolls surged 272k in May, well ahead of forecasts, while wages also grew 0.4% month-on-month with the employment market appearing to remain in a strong position.
China CPI suggests demand recovery
China's consumer price index, its main gauge of inflation, rose 0.3% year-on-year in May (falling 0.1% on a monthly basis), while the producer price index, which eyes China's manufacturing sector, fell 1.4%, with deflationary pressures continuing amid weak demand.
Retail sales accelerated to 3.7% year-on-year in May (from 2.3%), though Fixed Asset Investment continued to disappoint despite new stimulus for the housing market.
Meanwhile, Inbound Foreign Direct Investment fell 28.2% year-to-date as the country struggled to attract overseas investment amid weak demand and growing trade constraints.
ECB in first-mover rate cut
President Macron unexpectedly called a French parliamentary election after disappointing results in the European election, in an apparent attempt to blunt the ascent of the National Rally partly led by Marine Le Pen.
The ECB moved first amongst major central banks and cut interest rates by 0.25% to 3.75% as inflation levels dropped across the continent, although cautioned there may be a pause rather than further cuts.
The Composite PMI confidence indicator dropped to 50.8 in June from 52.2 previously as the manufacturing sector reported falling demand after a brief improvement.
And finally... elsewhere...
Narendra Modi won a third term as Prime Minister of India in a closer than anticipated election, with his support in parliament now reliant on smaller coalition parties which could slow down his pace of reforms.
The Japanese Yen fell below 160 to the USD and hit a 38-year low, despite Bank of Japan intervention to slow the weakness, as easy monetary policy led to significant capital outflows as investors look to lock in higher interest rates elsewhere.